Value Added Tax (VAT)

Imposition – Persons Liable (Sec. 105 NIRC)

Any Person who ITCOTOB:
1. SBEGoP (Sells, Barters, Exchanges Goods or Properties);
2. Sells services; and
3. Imports goods regardless W/N ITCOTOB.
Characteristics of VAT
1. Indirect Tax – Tax burden can be shifted to buyer from the seller who is statutorily (originally)
liable for the payment of the tax; (R.R. 16-2005 Sec. 4.105-2)
2. Tax is based on consumption (R.R. 16-2005 Sec. 4.105-2) – VAT takes effect immediately upon
every covered transaction; Regarding sales by reason of contracts, VAT takes effect inbetween
perfection and consummation stage
3. Percentage Tax

Elements of VAT (normal-rated)

1. Done ITCOTOB;
2. There must be SBEGoP; and
3. Not VAT-Exempt or VAT Zero-Rated.
Meaning of Ordinary Course of Business – Regular(ity of the) conduct or pursuit of a
commercial/economic activity, including transactions incidental thereto, by any person regardless of
whether or not the person engage therein is a non-stock, nonprofit private organization (irrespective of the
disposition of its net income and W/N it sells exclusively to members or their guests), or government
entity.
*Rendering services to an affiliate for a fee = Falls under doing ITCOTOB hence service is subject to
VAT (CIR v COMASERCO)*
*Fees collected by tollway operators (i.e., NLEX, SLEX) are subject to VAT. It has been ruled by the
Supreme Court that Tollway operators are engaged in rendering service. (Diaz v Secretary of Finance)

EXCEPTIONS Situation Effect of VAT

As to the regularity requirement
As to “pursuit of a commercial
or economic activity”
Cause: Taxpayer is a non-
resident foreign person.
Effect: No need for regularity
Cause: Importation of goods
for personal use.
Effect: Disregard said element
Taxpayer still becomes subject
to VAT
Said importation is still covered
by VAT because of Sec. 107
NIRC
Normal VAT transactions (rated 12%)
Three Categories:
1. Sale of Goods and Properties (Sec. 106 A, NIRC) – 12% VAT imposed on the gross selling
price and collected on every SBEGoP.

Gross Selling Price – Total amount of money or its equivalent which the purchaser pays or is
obligated to pay the seller in consideration of the SBEGoP excluding the VAT. The excise tax, if
any, shall for part of the gross selling price. This is the tax base for sale of goods/properties.

What constitutes goods/properties – General rule: ALL TANGIBLE AND INTANGIBLE

OBJECTS WHICH ARE CAPABLE OF PECUNIARY ESTIMATION…
Including a) Real properties held primarily for sale to customers, or held for lease
ITOCOTOB;
b) R/P to use patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, tradebrand or other like property or right;
c) R/P to use in PH of any Industrial, Commercial or Scientific property or
right;
d) R/P to use motion picture films, tapes and discs; and
e) Radio, television, satellite transmission and cable television time

Transactions Deemed Sale (Sec. 106 B, NIRC)

a) Transfer, use, or consumption not in the ordinary course of business of goods or
properties originally intended for sale or for use in the course of business;
b) Distribution or transfer to:
- Shareholders or investors as share in the profits of the VAT-registered persons
- Creditors in payment of debt;
c) Consignment of goods if actual sale is not made within 60 days following the date
such goods were consigned;
d) Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.
Authority of CIR to Determine Tax Base (Sec. 106 E, NIRC) – When it is a TDS or GSP is
unreasonably lower than AMV (Actual Market Value)

2. Sale of Services and Use or Lease of Properties (Sec. 108 A, NIRC) – 12% VAT imposed on
the gross receipts derived from sale or exchange of services, including use or lease of properties

Gross Receipts (Sec. 108) – Total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for materials
supplied with the services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed for another person, excluding
VAT. This is the tax base for Sale of Services and Use or Lease of Properties
*Gross Receipts doesn’t include amounts earmarked for payment to unrelated 3Ps or received as
reimbursement for advance payment on behalf of another w/c doesn’t redound to payor’s benefit*
 Meaning of Sale or Exchange of Services – Performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration.
*Exhibition of movies = amusement tax imposed by LGUs (CIR v SM)
*Cash deposits or advances received by taxpayers other than GPP from clients/customers shall be
subject to VAT, if applicable UNLESS: the amounts received ARE EARMARKED FOR
PAYMENT TO A THIRD PARTY. (Medicard Phils. Inc. v CIR)

3. Importation of Goods (Sec. 107 A, NIRC) – 12% VAT is imposed on the following:
a) Based on total value – used by BOC in determining Tariff and CD plus Customs Duties and
Excise Tax and other charges prior to removal of the goods from customs custody;
b) Based on Landed Cost – when customs duties are determined based on quantity or volume
of the goods.
Landed Cost – Invoice cost, freight, insurance, customs duties, excise tax and other charges
prior to removal of goods from customs custody. THE COST FOR WHEN GOODS ARE
“LANDED” to the destination port.

Transfer of goods by Tax-Exempt Persons – Not subject to VAT, but those transfers made
to non-exempt persons shall bear the VAT on importation that the seller is exempted from.
(Sec. 107 B, NIRC)
Destination Principle – Goods and Services are taxed only in the country in which they are consumed. If
sold (goods)/performed (services) in PH then they are taxed in PH. (See: Situs of Taxation)
*Consumption is the use of a thing in a way that thereby exhausts it. Applied to services, the term means
the performance or successful completion of a contractual duty, usually resulting in the performer’s
release from any past or future liability. (CIR v AMEX)
Hence, sales in ecozones (i.e., Clark Special Economic Zone) are considered special territories and under
destination principle, imposition of VAT in said ecozones are invalid.

Zero-Rated and Effectively Zero-Rated VAT Transactions

Purpose: To allow persons whose tax burden was passed be eligible for VAT credits or refunds
For Goods – There are THREE kinds of transactions but now has been REDUCED TO TWO
pursuant to the amendments by R.A. 10963 otherwise known as the TRAIN Law.

The two transactions are:

a. Export Sales
b. Sales to Persons/Entities exempted by special laws or international agreements which the
PH is a signatory – Also known as EFFECTIVELY ZERO-RATED because said laws
and/or treaties, in effect, enables these transactions be fixed at a rate of 0% which would
ordinarily be either under normal VAT transactions or exempt.
 Export Sales (E R1R2O S) (Sec. 106 (2) (a) NIRC TRAIN Amended)
1. Export – Sale and actual shipment of goods from PH to FC irrespective of any shipping
agreement;
2. Raw1 – Sale of RM to NR buyer for delivery to a resident local export-oriented enterprise
for manufacturing, processing or repacking in PH of buyer’s goods paid for in AFC
(acceptable foreign currency);
3. Raw2 – Sale of RM to export oriented enterprise whose sales exceed 70% of total annual
production;
4. Omnibus – Those considered export sales under Omnibus Investment Code of 1987;
5. Special – Sale to entities exempted under special laws or international treaties that PH is
a signatory to.
*Sale of Gold is now EXEMPT and FCD Sale is NO LONGER ZERO-RATED
For Services (POS-VCF) (Sec. 108 B, NIRC as Amended by R.A. 10963) – rendered to or for
purpose/s of or sale of:
1. Processing – manufacturing, or repacking goods for other persons doing business outside PH
2. Other services – than mentioned in preceding number to a person engaged in business outside
PH or to a NR person not engaged, also outside PH when services are performed
3. Special – laws or international treaties of which services were rendered to entities protected
by such.
4. Vessels – engaged in international shipping or intl. air transport ops. Also for transport of
passengers by air/sea vessels from PH to foreign country
5. (sub)Contractors - in P/C/Manufacturing goods for an enterprise with export sales exceeding
70% of total annual production;
6. Fuel – or Power thru renewable sources of energy and other emerging energy sources.
VAT Exempt Transactions (Sec. 109 NIRC As amended by RA 10963) – The following transactions
are exempt from VAT
A. S/I of Agricultural/Marine Food Products in their original state, livestock/poultry;
B. S/I of Fertilizers, Seeds, Seedlings, and Fingerlings; Fish, Prawn, Livestock and Poultry
Feeds; (local or imported)
C. Importation of Personal and Household Effects belonging to PH citizens returning from abroad
and non-resident citizens coming to resettle in the PH;
D. Importation of Professional Instruments and Implements, tools of trade, occupation or
employment, wearing apparel, domestic animals and personal and household effects (expanded to
overseas Filipinos) except vehicles, vessels, aircrafts, machinery and other similar goods;
E. Services subject to Percentage Tax;
F. Services by Agricultural Contract Growers and milling for others of palay to rice, corn to grits
and sugar cane to raw sugar;
G. Medical, Dental, Hospital and Veterinary services except those rendered by professionals;
H. Educational Services accredited by DepEd, CHED and TESDA;
I. Services rendered by an Individual pursuant to an Employer-Employee relationship;
J. Services by R/A HQ established in PH by MNCs acting as supervisory, communications and
coordinating centers for affiliates, subsidiaries or branches in Asia-Pacific region and do not earn
or derive income from PH;
K. Transactions exempt under international agreements by which PH is a signatory or under
special laws;
L. Sales by Agricultural Cooperatives registered with the CDA to their members as well as sale
of their produce whether in original state or processed to non-members. Importation of direct
farm inputs, machineries and equipment inc. spare parts to be used directly and exclusively
in the production and/or processing of their produce;
M. Gross Receipts from lending activities by credit or multi-purpose cooperatives registered
with CDA;
N. Sales by Non-Agricultural, Non-electric and Non-credit Cooperative registered with CDA;
provided share capital contribution of each member doesn’t exceed Php 15,000.00
O. Export Sales by non-VAT registered persons;
P. Sale of Real Properties not primarily held for sale/lease ITCOTOB for residential lots worth
Php 1.5M and below, and for house and lots and other residential dwellings worth Php 2.5M and
below;
Q. Lease of Residential Unit with monthly rental not exceeding Php 15k;
R. S/I, Printing, Publication of Books or any Newspaper, Magazine, Review or Bulletin which
appears at regular intervals with fixed prices or subscription or sale and which is not devoted
principally to the publication of paid advertisements;
S. Transport of Passengers by International Carriers;
T. S/I or Lease of Passenger or Cargo Vessels and Aircraft, including Engine, Equipment and
Spare Parts for domestic or Intl. transport operations;
U. Importation of Fuel, Goods and Supplies by Persons engaged in International Shipping or
air transport operations; provided said F/G/S shall be used for intl. shipping or air transport ops.;
V. Banking Services, Non-bank financial intermediaries performing Quasi-Banking functions;
W. Sale or Lease of G/S to Seniors and PWDs;
X. Transfer of property under Xec. 40; (Pun intended for easy memorization)
 Y. Association Dues, Membership fees, and other assessments collected by home-owners
associations and condo corporations;
Z. Zale of Gold to BSP; (Pun intended for easy memorization)
AA. Sale of Drugs and Meds prescribed for Diabetes, High Cholesterol, and
Hypertension (Beginning Jan. 1, 2019);
BB. Sale or Lease of G/P or Performance of Services other than those previously mentioned, with
Gross/Annual Sales and/or receipts does not exceed Php 3M.
Notes:
1. Laboratory services are exempted. But if the hospital/clinic operates a pharmacy, sale of drugs
and medicine is subject to VAT. (Sec. 109 G) Except for
HB/Diabetes/HCholesterol/Hypertension (Sec. 109 AA)
2. A health care company which merely provides and arranges for provision of pre-need health care
services to members is NOT VAT-exempt as it merely arranges for med services and not directly
providing for medical services.
3. Before TRAIN, for residential lots = Php 1,919,500 and below (now P1.5M and below under
TRAIN), for house and lot and other residential dwellings = Php 3,199,200 (now P2.5M and
below under TRAIN) (Sec. 109 P); Same principle applies that it is VAT-Exempt if the lot
concerned are two or more which is considered one sold to a buyer from the same seller, provided
the aggregate value does not exceed 1.5M and/or 2.5M respectively. Parking lots are separate and
distinct (regarding condominiums)
4. Educational services do not include seminars, in-service training, review classes and other similar
services rendered by persons not accredited by DepEd, CHED and TESDA. (Sec. 109 H)
5. Transactions exempt under international agreements except those granted under PD 529 or the
Petroleum Exploration Concessionaire (Sec. 109 K)
6. Residential Units referred to in Sec. 109 Q refers to apartments and houses and lots used for
residential purposes, and buildings or parts or units thereof used solely as dwelling places.
Motel/Hotel/Lodging houses/Inns etc. = not included.
7. Services provided by Banks and Non-Bank financial intermediaries referred to in Sec. 109 V are
subject to PERCENTAGE TAX (R.R. 4-2007)
8. Fees, Per Diems, honoraria or allowances given to directors of corporations = Exempt because
they are not derived from economic/commercial activity, merely remunerations paid in exercise
of a right of an owner in the management of a corporation.
Tax Credits (Sec. 110 NIRC)
Input tax – the VAT due from or paid by a VAT-registered person ITCOTOB on importation of goods or
local purchase of goods or services, including lease or use of property, from a VAT-registered person.
Output tax – VAT due on the sale or lease of taxable goods or properties or services by any person
registered or required to register under Sec. 236 of this Code.
Creditable Input Tax
1. Any input tax evidenced by a VAT invoice or OR issued in accordance with Sec. 113 shall be
creditable against the output tax:
a. P/I of goods:
i. For Sale;
ii. Conversion to finished product for sale;
iii. For use as supplies ITCOTOB;
iv. For use as materials supplied in sale of service;
v. For use in TOB for which deduction for depreciation or amortization is allowed under
this Code;
b. Purchase of services on which VAT has been actually paid;

Note: Amortization can only be allowed until Dec. 31, 2021 after which TPs with unutilized input
VAT on capital goods purchased or imported shall be allowed to apply the same as scheduled
until fully utilized (TRAIN Law Amendment to Sec. 110)
2. Input tax on domestic purchase or importation of goods or properties by a VAT-registered person shall
be creditable:
a. To the purchaser – upon consummation of sale and importation of G/P
b. To the importer – upon payment of the VAT prior to release of the goods from BOC custody
3. A VAT-registered person also engaged in transactions not subject to VAT shall be allowed tax credit:
(mixed transactions)
a. Total input tax, which can be directly attributed to transactions subject to VAT;
b. Ratable portion of any input tax which cannot be directly attributed to either activity. (They are
pro-rated)
Excess Input/Output Tax (Sec. 110 B) – At the end of every taxable quarter…
Rule:
a. If Output tax > Input tax = Excess is paid by VAT-registered person.
b. If Input tax > Output tax = Excess is carried over to the succeeding quarter/s; Provided, those
subject to zero-rated sales by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes.
The difference between IT – OT is called (NET) VAT PAYABLE
Transitional Input Tax Credits (Sec. 111 A) – A person who becomes liable to VAT or any person who
elects to be a VAT-registered person shall, subject to filing of an inventory… be allowed input tax on his
beginning inventory of goods and supplies equivalent to 2% of the value of such inventory or the
actual VAT paid on such goods whichever is higher, which shall be creditable against output tax.
Purpose: Benefits newly VAT-registered persons, in acquisition of their beginning inventory… Serves to
alleviate the impact of VAT on the taxpayer.
Presumptive Input Tax Credits (Sec. 111 B) – Persons/firms engaged in processing of sardines,
mackerel, and milk, and in manufacturing refined sugar and cooking oil, and packed noodle-based instant
meals (i.e., Lucky Me), shall be allowed a presumptive input tax, creditable against the output tax,
equivalent to 4% gross value in money of their purchases of primary agricultural products used as
inputs to their production.
Processing includes pasteurization (milk), canning (de lata food like sardines), activities which through
physical and chemical process alter the exterior texture or form or inner substance of a product in such
manner as to prepare it for special use to which it could not have been put in its original form or
condition.
Withholding of Creditable VAT (Sec. 114 C) – VAT deductions/Deductions to the 12% VAT rate
VAT is withheld by:
a. Sales of goods/services to the government (5% is withheld);
b. In payment for lease or use of properties to nonresident owners (12% withheld by lessee, they
will be acting as withholding agents so as to avoid a tedious process of the government running
after the VAT of non-residents)
Instances where Refunds or Tax Credits on Input Tax may be made:
Zero-Rated or Effectively Zero-Rated Sales (Sec. 112 A) – Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may w/in 2 years after the close of the taxable quarter when
sales are made apply for issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax
Cancellation of VAT registration (Sec. 112 B) – A person whose registration has been cancelled due to
retirement from or cessation of business, or due too changes in or cessation of status under Sec. 106 (C)
may within 2 years from date of cancellation, apply for issuance of a tax credit certificate for any
unused input tax which may be used in payment of his other internal revenue taxes.

Period within which Refund or Tax Credit of Input Taxes shall be made (Sec. 112 C, As amended
by R.A. 10963 aka TRAIN Law) Rule: 90 + 30 days judicial claim as opposed to then NIRC as
amended by RA 9333 having 120 + 30 days judicial claim
Commissioner shall grant a refund for creditable input taxes within 90 days from the date of submission
of the ORs/Invoices and other documents in support of the application filed (See. A and B)
When CIR finds such grant is not proper, he must state in writing the legal and factual basis for the
denial.
In case of full/partial denial of the claim for tax refund, TP affected may within 30 days from receipt of
decision denying the claim, appeal the decision with the CTA; Provided, however, that failure on the
part of any official, agent, or employee of the BIR to act within the 90 day period shall be punishable
under Sec. 269 NIRC (Sec. 269 Penalties: Fine of 10k – 50k, Imprisonment of 10-15 years and perpetual
DQ to hold public office, to vote and participate in any public election)
Persons required to register for VAT (Sec. 236 G, As amended by RA 10963 TRAIN Law) – Any
person who ITCOTOB, SBEGoP shall be liable for VAT if:
1. His gross sales/receipts for the past 12 months other than those exempt under Sec. 109 A to
BB, exceeds Php 3,000,000.00
2. Reasonable grounds to believe his gross sales/receipts for the NEXT 12 months WILL
EXCEED Php 3,000,000.00
Optional registration for VAT of Exempt Person (Sec. 236 H, As amended by RA 10963 TRAIN
Law)
1. Any person who is not required to register for VAT MAY elect to register for VAT by
registering with the RDO (Revenue District Office) that has jurisdiction over the head office of
that person and paying the annual registration fee (Php 500; Sec. 236 B)
2. They shall not be entitled to cancel his registration for the next 3 years.
Cancellation of VAT registration (Sec. 236 F) – A VAT-registered person may cancel his registration
for VAT if:
a. He makes written application and can demonstrate to CIR satisfaction his gross S/R for the
following 12 months over than those that are exempt will not exceed 3M;
b. He has ceased to carry on his trade/business and does not expect to recommence any T/B within
the next 12 months
*Cancellation will take effect from the first day of the following month.
Compliance Requirements (Sec. 113 NIRC)
A. Invoicing requirements – A VAT-registered person shall issue:
1. VAT Invoice for every SBEGoP;
2. A VAT Official Receipt (OR) for every lease of goods or properties, and for every SBES
(Sale, Barter, Exchange of Services);
B. Information contained in the VAT INVOICE or VAT OR:
1. A statement the seller is VAT-registered and a TIN (Taxpayer’s Identification Number);
2. Total amount purchaser pays/is obligated to pay to the seller with indication such
amount includes VAT: Provided that:
a. Amount of tax shown as a separate item in the invoice or OR;
b. If sale is exempt – the term “VAT-exempt sale” is written/printed prominently; Failure
to do this makes the issuer liable for the tax imposed under Sec. 106 or 108 as if Sec.
109 did not apply making it “technically a VAT rated (normal or zero) transaction”.
(Sec. 113 (D) (2)NIRC).
c. If subj. to zero-rated sale – the term “Zero-rated sale” is w/p prominently;
d. If mixed – it shall clearly indicate the breakdown of the sale price between: Taxable,
Exempt, and Zero-Rated components and calculation of each portion be shown in the
invoice or OR; Provided, seller may issue separate invoices or receipts for taxable,
exempt and zero-rated components.
3. Date of transaction, quantity, unit cost, and description of the goods or properties or
nature of service;
4. In case of sale amounting to Php 1,000.00 or more where transfer is made to another VAT-
registered person, it shall also include the name, business style, if any, address and TIN
of the purchaser, customer or client.
C. Accounting Requirements – All persons subject to VAT under Secs. 106 and 108 (Normal and
Zero-Rated) shall maintain a sales journal and subsidiary purchase journal on which the
daily sales and purchases are recorded.
*Zero-Rated VAT and VAT-Exempt transactions MUST APPEAR in the OR or invoices otherwise
RR 7-95 is controlling and persons applying for tax credits or refunds will not be granted because it is
a valid exercise of administrative rule-making power by the CIR. (Panasonic v CIR)
*RA 9335’s NIRC made it explicit that the word zero-rated must appear in ORs/Invoices (Sec. 113
(B) (2c) NIRC)
Consequences of Issuing Erroneous VAT invoice or VAT OR (Sec. 113 D NIRC) – If a person who is
not a VAT-registered person issues an invoice or receipt showing his TIN followed by the word VAT…
a. Issuer is liable to:
i. Tax imposed in sec 106 or 108 without benefit of any Input Tax Credit; and
ii. 50% surcharge;
b. VAT shall be recognized as an input tax credit to the purchaser – meaning that the purchaser can
use this to offset any internal revenue tax liabilities under “itemized deductions”;
Return and Payment of VAT (Sec. 114 NIRC, As amended by RA 10963 TRAIN Law)
(A) In General – Every person liable to pay the value-added tax shall file a quarterly return of the
amount of his gross sales or receipts within 25 days following the close of each taxable quarter
prescribed for each taxpayer: Provided, however, that VAT-registered persons shall pay the VAT
on a monthly basis. Provided, finally, That beginning Jan. 1, 2023, the filing and payment
required under this subsection shall be done within 25 days following the close of each taxable
quarter. (That the highlighted portion is the additional sentence introduced by TRAIN Law)

Any person, whose registration has been cancelled in accordance with Sec. 236, shall file a return
and pay the tax due thereon within 25 days following date of cancellation: Provided, only one
consolidated return shall be filed by the TP for his principal place or head office and all branches.
(B) Where to File Return and Pay the Tax – To an authorized agent bank, Revenue Collection
Officer or duly authorized city/municipal treasurer located within the revenue district where
taxpayer is registered or required to register.

Power of Commissioner to Suspend Business Operations of a Taxpayer (Sec 115 NIRC) – When the
following violations are committed:
a. Regarding VAT-registered persons:
1. Failure to issue receipts or invoices;
2. Failure to file a VAT return; (as required by Sec. 114)
3. Understatement of taxable sales/receipts by 30% or more for the taxable quarter;
(Kinulang, sadya or otherwise)
b. Failure of any person to register as required by Sec.236 – The temporary closure of establishment
shall be for the duration of not less than 5 days and shall be lifted only upon compliance with
whatever requirements prescribed by CIR in closure order.

Percentage Tax for Persons Exempt from VAT (Sec. 116 NIRC, As amended by RA 10963 TRAIN
Law) – Any persons whose sales or receipts are exempt under Sec. 109 (BB) of this Code from the
payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to 3% of
his gross quarterly sales or receipts; Provided, Cooperatives, and beginning Jan 1, 2019, self-employed
professionals with total annual gross sales and/or gross receipt not exceeding Php 500,000.00 shall be
exempt from the 3% gross receipts tax herein imposed.